One major advantage in my mind of the mega backdoor Roth over your Roth 401k is that it is entirely separate from any pre-tax 401K contributions you have. This is potentially hugely important if your withdrawals from your 401k are distributed pro-rata. In other words, I can withdraw money specifically from my Roth IRA and keep my taxable income down whereas if my policy does not allow source-specific withdrawals then I am going to be at the mercy of whatever taxes are collected on my required distributions based on my cost of living. Company matching and profit sharing are generally pre-tax contributions as well. Having the flexibility to supplement taxable with non-taxable is usually beneficial especially if you are interested in doing further Roth conversions right after retirement
6:58 An even better option here, if your specific plan allows for, is to contribute all employee contributions to after-tax then do an instantaneous in-plan Roth rollover (after-tax → Roth 401(k)) first. Then roll the Roth 401(k) balance to your personal Roth IRA once a year, the original after-tax basis receives the most favorable treatment possible in the Roth IRA (the 'Super Mega Backdoor Roth' strategy). Since the original contributions were after-tax the original contributions and associated earnings are eligible for rollover into your personal Roth IRA.
The portion of the rollover that is investment in the contract (i.e., the original after-tax contributions + any regular Roth 401(k) contributions) is treated as regular Roth IRA contributions once it lands in your Roth IRA. Regular Roth contributions are the first money out under Roth IRA ordering rules. They are always 100% tax- and penalty-free, at any age, at any time — no 5-year clock, no 59½ requirement.
You can keep a separate Roth IRA just for these annual Mega Backdoor rollovers. That makes tracking the basis simple and prevents the new money from mixing with older regular Roth contributions (though even if mixed, regular contributions still come out first across all your Roth IRAs). When you eventually withdraw, use Form 8606 (Part III) to report the nontaxable basis if needed, but because it’s treated as regular contributions, most people never owe tax or penalty on that slice.
Do you have to be 59.5 to move after tax contribution to a Roth IRA or your Roth 401k? Or can you do it whenever? I think I’m getting confused with in service distributions vs in service withdrawal. Or are they the same thing lol
@MatSorensen Do you have to max out the employee contribution or can you just meet the match and then do the remaining to equal the $72K-$80K in the After tax contribution?
The 401k plan must allow withdrawing non-Roth after-tax contributions. I worked at an employer that didn't allow withdrawing non-Roth after-tax contributions until your 401k account with them was 5 years old or you left the company. Always check the 401k summary plan description.
There are now solo ROTH 401ks (if you’re an eligible self-employed person) that simplify this since there is not an income phaseout/cap for the Solo Roth 401k like a ROTH IRA…
@MatSorensen, Hi, Mat, My employer provides 401K pretax plan ($0 match) and 401K aftertax plan ($0 match), but does not provide Roth 401K. For the contribution limit of $72,000, as you mentioned that we can contribute $24,500 in pretax and $47,500 in aftertax. I don’t have enough compensation to contribute $72,000 and would like to put more aftertax contribution for future rolling over to a Roth IRA. Do I need to fill up $24,500 in pretax before I can contribute to the aftertax plan? For example, Can I contribute $10,000 to pretax and $47,500 to aftertax? Thank you.
Why wouldn’t you do the employer contribution as a business owner with Solo401k? Shouldn’t you have the employer contribution set up so you able to deduct this from the business tax return?
One major advantage in my mind of the mega backdoor Roth over your Roth 401k is that it is entirely separate from any pre-tax 401K contributions you have. This is potentially hugely important if your withdrawals from your 401k are distributed pro-rata. In other words, I can withdraw money specifically from my Roth IRA and keep my taxable income down whereas if my policy does not allow source-specific withdrawals then I am going to be at the mercy of whatever taxes are collected on my required distributions based on my cost of living. Company matching and profit sharing are generally pre-tax contributions as well. Having the flexibility to supplement taxable with non-taxable is usually beneficial especially if you are interested in doing further Roth conversions right after retirement
If you convert all to Roth IRA with the $35,500 won’t you get hit with the 6% penalty per year for going over the contribution limit?
6:58 An even better option here, if your specific plan allows for, is to contribute all employee contributions to after-tax then do an instantaneous in-plan Roth rollover (after-tax → Roth 401(k)) first. Then roll the Roth 401(k) balance to your personal Roth IRA once a year, the original after-tax basis receives the most favorable treatment possible in the Roth IRA (the 'Super Mega Backdoor Roth' strategy). Since the original contributions were after-tax the original contributions and associated earnings are eligible for rollover into your personal Roth IRA.
The portion of the rollover that is investment in the contract (i.e., the original after-tax contributions + any regular Roth 401(k) contributions) is treated as regular Roth IRA contributions once it lands in your Roth IRA. Regular Roth contributions are the first money out under Roth IRA ordering rules. They are always 100% tax- and penalty-free, at any age, at any time — no 5-year clock, no 59½ requirement.
You can keep a separate Roth IRA just for these annual Mega Backdoor rollovers. That makes tracking the basis simple and prevents the new money from mixing with older regular Roth contributions (though even if mixed, regular contributions still come out first across all your Roth IRAs). When you eventually withdraw, use Form 8606 (Part III) to report the nontaxable basis if needed, but because it’s treated as regular contributions, most people never owe tax or penalty on that slice.
Do you have to be 59.5 to move after tax contribution to a Roth IRA or your Roth 401k? Or can you do it whenever? I think I’m getting confused with in service distributions vs in service withdrawal. Or are they the same thing lol
Does the employer match count against the $72k limit?
@MatSorensen
Do you have to max out the employee contribution or can you just meet the match and then do the remaining to equal the $72K-$80K in the After tax contribution?
The 401k plan must allow withdrawing non-Roth after-tax contributions. I worked at an employer that didn't allow withdrawing non-Roth after-tax contributions until your 401k account with them was 5 years old or you left the company. Always check the 401k summary plan description.
Best video on this topic! Thanks a lot!
There are now solo ROTH 401ks (if you’re an eligible self-employed person) that simplify this since there is not an income phaseout/cap for the Solo Roth 401k like a ROTH IRA…
@MatSorensen,
Hi, Mat, My employer provides 401K pretax plan ($0 match) and 401K aftertax plan ($0 match), but does not provide Roth 401K.
For the contribution limit of $72,000, as you mentioned that we can contribute $24,500 in pretax and $47,500 in aftertax. I don’t have enough compensation to contribute $72,000 and would like to put more aftertax contribution for future rolling over to a Roth IRA.
Do I need to fill up $24,500 in pretax before I can contribute to the aftertax plan? For example, Can I contribute $10,000 to pretax and $47,500 to aftertax? Thank you.
Why wouldn’t you do the employer contribution as a business owner with Solo401k? Shouldn’t you have the employer contribution set up so you able to deduct this from the business tax return?
@MatSorenson please provide your thoughts on the potential for the federal government to somehow tax Roth distributions in the distant future.
Feels like one of those “check back in a year” projects.
40 years ago today on January 28, 1986 remembering the tragic event of the Challenger disaster. Where will when this happened?